Banks lost $26 billion in fourth quarter

Friday

WASHINGTON — The nation's banks lost $26.2 billion in the last three months of 2008, the first quarterly deficit in 18 years, as the housing and credit crises escalated.

WASHINGTON — The nation's banks lost $26.2 billion in the last three months of 2008, the first quarterly deficit in 18 years, as the housing and credit crises escalated.

The Federal Deposit Insurance Corp. said yesterday that U.S. banks and thrifts also more than doubled the amount they set aside to cover potential loan losses, to $69.3 billion in the fourth quarter from $32.1 billion a year earlier.

Regulators said there were 252 banks in trouble at the end of 2008, up from 171 in the third quarter.

The FDIC also said that for all of last year, the banking industry earned $16.1 billion, the smallest annual profit since 1990. The fourth-quarter loss compared with a $575 million profit in the fourth quarter of 2007.

Rising losses on loans and eroding values of assets "overwhelmed" banks' revenues in the fourth quarter, the FDIC said. More than two-thirds of all banks and thrifts turned a profit in that period, but their earnings were outstripped by large losses at a number of major banks.

FDIC Chairman Sheila Bair, reaching for a silver lining in the dismal picture, noted that total bank deposits increased in the October-December period by $307.9 billion, or 3.5 percent — the largest rise in 10 years. Deposits in domestic bank offices rose $274.1 billion, or 3.8 percent. That showed confidence in the banking system and deposit insurance, Bair said. But she acknowledged that "the fourth quarter was a tough end to a tough year for the banking industry."

The latest indications of financial distress came as the Obama administration proposed boosting the federal deficit by an additional $250 billion this year, enough to support as much as $750 billion in increased spending under the government's rescue program for banks and other financial institutions. That would more than double the $700 billion bank bailout passed by Congress in October that has provided aid to Citigroup Inc., Bank of America Corp. and hundreds more financial institutions of all sizes.

The Office of Thrift Supervision, meanwhile, announced a loss of $3 billion in the fourth quarter and a record $13 billion annual loss for savings and loans last year.

The agency, part of the Treasury Department, also said it is launching a new unit to monitor thrifts with more than $10 billion in assets.

The new "large bank unit" will be working on-site at about 25 savings institutions. The OTS also will create new standards for reviewing enforcement actions on thrifts that do not meet minimum standards.

Thrifts are important to consumer lending because they must have at least 65 percent of their lending in mortgages and other consumer loans. That also has made them especially vulnerable to the housing downturn: troubled assets now account for more than 2.5 percent of total thrift assets, up from nearly 1.7 percent a year ago.

Two of the biggest bank failures in the nation's history occurred last year and involved thrifts, and some lawmakers have raised concerns about the OTS' oversight of the industry.

Pasadena, Calif.-based IndyMac Bank collapsed in July and cost the federal deposit insurance fund nearly $9 billion, and Seattle-based Washington Mutual Inc. was the largest U.S. bank failure ever. WaMu fell in September, with around $307 billion in assets, and was acquired by JPMorgan Chase & Co. for $1.9 billion in a deal brokered by the FDIC.

The FDIC now believes U.S. bank failures will cost the deposit insurance fund more than $40 billion over the next four years amid the ravages of rising unemployment and falling home prices that have sent loan defaults soaring.

Fourteen federally insured institutions already have failed this year, extending a wave of collapses that began in 2008 — when regulators shut down 25 U.S. banks. Last year's tally was more than in the previous five years combined and up from only three bank failures in 2007.

The failures sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, from $52.4 billion a year earlier.

The FDIC today will propose raising the insurance premiums paid by U.S. banks and thrifts. That will follow a plan to rebuild the deposit insurance fund put in place in October that increased average premiums to 13.5 cents for every $100 of banks' deposits from 6.3 cents.

U.S. banks and thrifts in the third quarter suffered a 94 percent drop in profits to $1.7 billion, from $27 billion in the same period in 2007. The institutions wrote off $27.9 billion in loans as uncollectible during the July-September quarter.

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